Just Economics

When Catholics discuss the topic of social justice, the focus is usually on economic justice. Here is one example. We Believe: Grade 4, a religion textbook published by Sadlier, a Catholic publishing house, teaches that social justice demands access to health care and housing and that among our human rights are employment and a fair wage. But how do these ideas mesh with our understanding of how a modern economy produces, prices and allocates these goods and services? To answer this question it is necessary to explore the factual and logical inconsistencies of what seems to be the social justice agenda.

The goals of social justice assume a society prosperous enough to support them. But throughout history the vast majority of humanity has lived out its existence barely above subsistence level. Prosperity has been rare and transitory. Now we live in an unprecedented era of widespread prosperity. The estimated poverty rate worldwide has dropped 80 percent over the last 30 years, and the absolute number of poor people has declined by hundreds of millions. Every region of the world has experienced a decline in poverty rates, including Africa. The rate there has declined over the past 10 years, according to a working paper for the National Bureau of Economic Research by Maxim Pinkovskiy and Xavier Sala-i-Martin. This prompts two sets of questions: 1) How did this prosperity come about, and how can it be preserved? 2) What destroys prosperity, and how can that be avoided?

The students in my course on macroeconomic principles often point to ownership of natural resources as a reason that nations are prosperous, but it is easy to think of places that are resource-poor yet prosperous. Hong Kong, Singapore and Japan are often cited. The prosperity of such nations suggests they possess innovation, technology, education and better health—yet those are as much consequences as causes of prosperity. The answer seems to lie in the way society is organized, especially how its structure creates incentives that channel the efforts of its members. People seek to gain income and wealth. Do we gain them through our own productive activity or at the expense of someone else? Economists refer to the latter as “rent-seeking.” This happens when a company, organization or individual seeks economic gain from others without creating any good, service or other benefit in return. One example is lobbying for government subsidies that redistribute income, goods or services from one group to another. A less obvious example is lobbying for competition-restricting regulations that allow the privileged to obtain higher profits (for example, limits on the number of taxi medallions issued in New York City). Theft, fraud and embezzlement are examples of illegal forms of rent-seeking.

To become prosperous, a society must ensure that production, rather than rent-seeking, is the most promising way for individuals to earn income and wealth. So national security abroad and law and order at home are necessary. It is also necessary to keep rent-seekers from exploiting the tax and judicial systems. Adam Smith, the 18th-century philosopher, observed, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

In this environment, the “natural course of things” means that people will produce what they can produce most efficiently and then trade this for other goods they need. Thus a system of free enterprise, also known as the free-market system, comes about. This system of specialization and trade is what is truly responsible for the breathtaking prosperity that exists today in industrialized countries and that is lifting millions out of poverty as it spreads to more countries. To give a man a fish feeds him for a day, but a market can galvanize him to learn to fish so well that he can feed himself and many others. This is how society becomes prosperous. It is important to understand that the free enterprise system is the only system that economists know of that can do this. There is no alternative.

Why then, does the free-market system have so many enemies, including many advocates for social justice? Maybe it is because, although the absolute condition of the poor improves, their position vis-à-vis the wealthy sometimes worsens. While the evidence of this effect is inconclusive, there is some evidence that when market systems spread to new nations and/or there is rapid innovation and technological change, incomes become less equal, at least initially.

Prosperity generates savings and investment in capital and technology that creates jobs and higher wages for others. It makes possible a level of health care and housing not previously available. Social justice seems to demand that the benefits of a prosperous society be more widespread to those who are less productive (in an economic sense). How and why this should happen is important from both a practical and a moral perspective. “Spreading the wealth” is potentially costly, so it is worth considering whether the cost justifies the benefits, both moral and practical. Here the advocates of social justice fall seriously short.

A ‘Right’ to Others’ Efforts?

Few people would argue against the idea that it is best to encourage and assist people to become more productive whenever possible. In addition to more prosperity, this creates a sense of satisfaction and self-worth and is almost surely most consistent with God’s plan. Therefore, we should teach that it is immoral to collect unemployment compensation or food stamps or disability payments, regardless of what the law allows, if we are capable of earning our own way. Yet the We Believe: Grade 4 textbook has no hint of this principle. Lest readers think these topics are inappropriate for fourth graders, be reminded that this same textbook describes jobs and fair wages as human rights. What effect does this one-sided treatment have on our children’s sense of entitlement and their view of self-reliance as a moral duty? Should we not push our elected officials to change social programs that discourage people from working? This does not seem to be part of the social justice agenda.

As for jobs, we should consider in what way this is a question of human rights. Who should provide these jobs? Entrepreneurs identify business opportunities and then, using their ingenuity and risking their own money and time, establish companies that employ people. This generates tax revenue to pay for government employees. The rest of us depend to a large extent on the creativity of this small group of people. Do we really have a right to the benefits? Maybe we should teach our children to be grateful for these entrepreneurs. Maybe we should call attention to ethical business people as being as important a part of society as the firefighters and rescue workers who are paid with our tax money. Should we not lobby our elected officials to eliminate anticompetitive regulations that keep people from getting jobs and starting companies? This does not appear to be part of the social justice agenda.

What is a fair wage? In a free and competitive market, firms pay wages that reflect workers’ productivity. If they pay more, they go out of business. If they pay less, workers are free to go elsewhere. Only by colluding and taking advantage of a labor pool trapped in a location can firms force wages below this level, a situation less and less common in today’s highly mobile society. If a fair wage means a higher wage, then the problem is different. Worker productivity depends on the level and quality of education/training and capital investment. Here Catholics are right to push for better options in education, especially for the disadvantaged, since the United States gets the worst value per dollar spent on K-12 education among industrialized nations. But capital investment requires a tax and transfer system more favorable to savers, who are the suppliers of investment funds. Right now the United States has one of the most progressive (redistributionist) tax systems in the industrialized world and one of the least progressive transfer systems, according to the Organization for Economic Cooperation and Development. This encourages consumption and borrowing rather than saving and investment. The result is that wages and living standards stagnate or fall. Should we not push for policies that discourage consumer borrowing and encourage saving?

A Cost-Benefit Analysis of Redistribution

Ironically, the redistribution of income and wealth through the tax system discourages the productive activity that created prosperity in the first place. A tax and transfer system is institutionalized rent-seeking and has a cost in lost production. Is redistribution “worth it” in terms of lost prosperity? Are those living in poverty better off with an unequal slice of a bigger economic pie or an equal slice of a smaller economic pie? As a practical matter, that is the choice. Second, is compulsory redistribution justified morally if the prosperity generated by the free enterprise system raises the absolute condition of the poor to an acceptable level?

The evidence generated by the economics profession on the first question is embarrassingly scanty. Yet there are a few indications about the effects of redistributionist efforts. Mr. Sala-i-Martin and Mr. Pinkovskiy find that reductions in poverty rates are closely correlated with economic growth but not correlated with reductions in income inequality. Theoretical models show that the United States is better off with a less redistributionist tax and transfer system, including for those who are less fortunate. Empirical evidence reveals that extremely redistributive systems result in everyone being worse off. In these situations there is no access to decent health care or housing. The evidence on the mixed approach taken by some European countries in the 1980s and 1990s shows that the poorest 20 percent have a living standard comparable to the poorest 20 percent in the (formerly less) redistributionist United States, whereas the top 80 percent in Europe have a lower living standard than the top 80 percent in the United States. Based on this limited evidence, the cost of redistribution in terms of lost prosperity appears to be pretty steep.

This cost might be worthwhile if it results in a population that is more compassionate, more moral and endowed with a greater sense of justice. What is the evidence for this in societies that have more redistibutionist tax and transfer systems? Does public charity and service to the poor through the tax and transfer system supplement private charity and service or take their place? What incentives exist in tax and transfer systems to help the poor live a moral and productive life? Have the Catholic advocates of social justice collected any evidence or devoted any thought to these questions?

It is almost certainly true that some minimal level of compulsory redistribution will be needed to take care of those who cannot be productive in an economic sense. But this is not the issue addressed here. The issue is whether, as Catholics, we should advocate for tax and subsidy programs that go beyond a minimal safety net. Is it right to compel productive people to be charitable? Or is it our duty to persuade them to be so of their own accord? Is it social justice to advocate for more redistribution as a public policy? Or is it social justice to bring productive people together with those in need within church communities to inspire the generosity, help and compassion Christ asked for?

Many well-meaning people who advocate policies based on social justice seem not to have considered these questions. There is a failure to appreciate that in many cases, the economic incentives of these policies lead to the problems they are designed to solve and reinforce the behaviors that caused the problems in first place.

There is only one economic system that is capable of eliminating widespread poverty: the free-market system, which depends on an enterprising and self-reliant population. Making that system more competitive and more accessible is true social justice in action. Encouraging and enabling nonproductive members to become productive, whenever possible, is social justice.

Advocating for redistribution through the tax and transfer system erodes prosperity and undermines the attitudes that created it. Can this be social justice? The central problem is to figure out how to get the market system to work for as many as possible without destroying it. If the Catholic Church is to help the condition of the poor, then its contribution should be to think through much more carefully what social justice entails in a modern market economy.

Stacie Beck is an associate professor of economics at the University of Delaware in Newark, Del., and a catechist at St. Gabriel of the Sorrowful Mother Parish in Avondale, Pa.